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Thursday, December 6, 2007



Another big banking scam may be about to occur. It appears that the banking industry is about to freeze the rates some sub-prime customers are getting.

Let me tell you how the sub-prime loans operate or, at least, the way mine works. You are offered a sub-prime loan whose real interest rate is tied to the feds rate. As the feds rate goes up so does your real rate. When the feds rate goes down, your real rate also goes down.

Several years ago when the rates were low, banks were offering great low rates but those rates were to increase as the feds rate increased. You were also given the option to 1) pay less than the amortized amount of principal with no interest payment, 2) to pay an amount of amortized principal and no interest, 3) to pay an amortized amount of principal based on a 15 year amortization schedule plus interest, and 4) an amortized amount of principal on the full term of the loan plus interest. Who would have thought that the fed was about to embark on a series of interest rate hikes monthly for about one year. Soon all the people who bought low rate loans were now faced with rates over twice what they were paying initially. Of course both options one and two were extremely dangerous because your principal would increase significantly each month as the less than the amount of amortized principal and the interest were added each month increasing your principal.

We are now experiencing a series of interest rate decreases and individuals can expect their interest to decrease as the rate decreases take effect. The government is suggesting that the banks freeze the interest rates at the present rate to help those in trouble. But here is the question: if the rates are frozen during a period of decreasing rates does this mean that the decreasing rates will not be passed on to the customer because their rate has been frozen at the higher amount? I hope the public does not trust the government or the banks to take care of the customer. Not to be cynical, but I believe the banks, anticipating a series of rate decreases, are wanting to freeze the rate at a higher amount.

Who will look into this?

nicola michael c. Tauraso, M.D.
Director, Tauraso Medical Clinic
posted on Dr. Tauraso’s Blog on 12/6/2007

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